Question

URGENT
1) How the monetary policy can be used to dampen an overheated economy? Explain.

(6 Points)  

2) How are the following treated in the estimation of national income? Give reasons a. Payment of pocket money to a child (3marks) b. House rent allowance paid to the teachers by school (3marks)

Answer 1

1. An economy which has experienced a prolonged period of good economic growth is termed as over heated economy. Such economy expands at an unsustainable rate. The short run aggregate demand exceeds long run aggregate supply. An overheated economy is characterized by rising inflation and unemployment rate lower than the natural rate of unemployment. Monetary policy can be used to decrease money supply to dampen overheated ( inflationary) economy; i. Increasing discount rate , ii. Sale of government securities ( treasury bills) under open market operations iii. Increasing required reserve ratios etc.

2.. i. Payment of pocket money to child — It is not included in the national income of the country, because it is a transfer payment. The child is not producing any goods or services. ii. HRA paid to teachers by school ‐ Yes, it will be included in the national income of the county, because it is paid for active economic service rendered by teachers , it is treated as a part of compensation of employees.